An Examination of Fundraising Options for Early Stage Sustainable Agriculture Startups

As entrepreneurs, one of our early challenges is finding funding faster than we’re burning through our savings; it’s a choke point that’s so common that it’s referred to as “the Valley of Death”. This realization often comes at the worst possible time – when you’re equally busy trying to figure out packaging, and which regulations you need to meet, and then you realize that you’re going to need more cash to make it all happen. “I need to find the path that leads to funding fastest,” concluded one sustainable agriculture entrepreneur.

Two obvious paths to funding for young startups are through Department of Agriculture (USDA) grants, especially the Small Business Innovation Research (SBIR) program, and via Kickstarter, the crowdfunded donation site. There are a number of similarities between the programs in that neither requires an entrepreneur to give up equity in their venture, and both offer funding fairly swiftly to very early stage ideas.

To date, Kickstarter has funded $9.1 million[1] in their ‘food’ category, the one into which sustainable agriculture projects typically fall. The USDA’s SBIR program is far larger, making grants of around $61.5 million in the same time period. Each year, the USDA specifies areas in which they wish to see technologies developed. The odds of picking up funding through each program are pretty similar; 3 in 10 for Kickstarter, just under 2 in 10 for SBIR grants[2].

A common misperception for both paths is that they provide “free money”. In fact, the bulk of successful Kickstarter projects are effectively pre-selling their planned product at a discount. For instance, Kerfuffles Marshmallows, a Tennessee-based maker of all-natural as well as vegan marshmallows offered t-shirts, dozens of marshmallows and even custom-flavor marshmallows to its backers. Most projects end up missing their delivery deadlines, and, in some extreme cases, this has begun to generate mutterings of lawsuits from aggrieved backers. For an SBIR grant, you agree a specific scope of works with the USDA, and then report back on your progress regularly.

One other factor with regard to SBIR funding is that it takes an average of 9.5 months from application to receiving funding, and there’s a fair amount of negotiation likely necessary in the meantime. This can be quite the distraction if you’re focused on getting your product out the door. As one grant recipient lamented to me, “I thought I’d just get a check and that would be the end of it.” Kickstarter, by contrast, funds successful projects shortly after closing; “the money showed up pretty quickly,” according to one sustainable agriculture entrepreneur.

Despite the hype around Kickstarter, successful projects in the food category raise just under $18,000 on average, far less than the $100,000 offered in Phase I and up to $450,000 in Phase II by this year’s USDA SBIR solicitation. If your project goes well during Phase I of an SBIR, you can apply for a larger second phase within a year. For instance, Applied Geosolutions, which is developing software to measure the impact of row crop tillage practices on the environment, won a Phase I award of $80,000 in 2009, and followed it with a Phase II one of $460,000 last year.

The first phase of SBIR grants is designed to test the feasibility of your technology, so many of the projects are at a very early stage, some not even at prototype stage. Kickstarter campaigns tend to be much later stage; you have to be pretty much ready to go into production to meet your commitments.

Broadly, Kickstarter is probably a better choice for creative types and SBIR for left-brained, logical types. The best Kickstarter campaigns are incredibly creative in their graphic design, in the rewards that they offer and in their copyrighting. For instance, Kickstarter advises that you include a video in your campaign; “there are few things more important to creating a quality Kickstarter project than a good pitch video,” according to the company. On the other hand, SBIR grants require a crazy amount of attention to detail and the ability to decipher complex FFOs, the government equivalent of a request for proposal.

For many years, there were few options to raise funds for the early stage of sustainable agriculture projects. The revival of early stage investing, fueled by a combination of the USDA, crowdfunding and the rise of impact investors and super-angels, is filling the gap, but the revolution is still to come when the recently passed JOBS (Jumpstart Our Business Startups) Act is finally implemented.